UK: Malt Whisky And North Sea Oil – Two Great Scottish Exports With More iI Common Than You Think

One is well-aged, complex and sells for a premium... the
other is a single malt Scotch whisky.

The maturity of the North Sea's oil reserves has
long been a topic for discussion in the industry, and our latest
report shows drilling and deals are both down offshore
Aberdeen.

Whisky and North Sea oil have both been long-regarded as
successful Scottish exports. But their association with Scotland is
not all they have in common.

For example, in April the Scotch Whisky Association reported a flat year for exports of the national drink
after a drop in demand from Asian markets. Over the same period,
we've seen a decrease in North Sea corporate deals and drilling
activity.

However, North Sea oil and whisky have another important theme
in common: the longer they mature, the more expensive they become.
That's a finding that is reflected in our latest Petroleum
Services Group (PSG) report for Q1 2014, which looks into oil and
gas activity across North West Europe.

The headline figures for the first three months of 2014
were:

12 E&A wells were drilled on the UKCS
– That's up five wells on the final quarter of 2013, but
represents a decrease of one well on a year ago.

10 deals were reported this quarter –
This is eight fewer than the last quarter and nine down on the same
time last year.

Farm-ins remain popular – They
represented 50% of deals this quarter suggesting operators are
spreading risk.

It's undoubtedly a mixed bag. A casual glance at these
findings might cause concern, but things are not as black and white
as they might at first appear.

Drilling activity is down on a year ago, but slightly up on the
last quarter. Some of this can be put down to the bad weather often
experienced during winter months which has affected exploration and
drilling in Q1. We could well see an upturn later this year if the
weather improves.

Likewise, we've seen a reduction in the number of corporate
deals, both compared to a year ago and against last quarter. While
that doesn't make for a great headline, the reality is slightly
more complex.

There are certainly deals being done in the North Sea, but they
may take some time to complete. At the moment, vendors and buyers
are quite far apart in terms of price expectations and that's
having an effect on deal flow.

The North Sea has been fertile ground for oil and gas operators
for some years, and that has an impact on costs. The economics of
profitable extraction are becoming increasingly difficult, which is
likely to lead to more caution among operators.

It's mainly for that reason we're seeing farm-ins take
hold as the most common type of deal being done in the region.
These help operators reduce their risk and cut costs by sharing a
field with another company within the time frames they are required
to drill.

Nevertheless, we're seeing movement on issues that could
address this challenge. Sir Ian Wood's report, "UKCS
Maximising Recovery Review", is a positive step and looks as
though it could lead to more incentives for the industry.
That's something we called for in
our blog from earlier this year. In addition, this year's
Budget also saw the announcement of a review of the North Sea's
fiscal regime, to ensure it is fit for purpose.

Meanwhile, we're also hearing some evidence that rig rates
are coming down which is also good news for operators. On the other
hand, the industry has expressed concern at the bareboat charter
announced in the Budget, which could see higher costs passed on to
them.

While we might not see the levels of activity that were
registered in the peak years, we expect there to be a steady low in
the North Sea for the year ahead. There is much to be done if we
want to instil confidence in the industry and see a return to the
performance of its boom years.

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